Redundancy and Sick Leave: Employer’s Compliance Guide in Australia

If you’re a business owner in Australia, managing staffing changes is a part of daily life. One of the trickiest areas to navigate is what happens to sick leave entitlements when an employee is made redundant.

Whether you’re facing the end of a major project, a downturn in business, or need to restructure for growth, redundancy can be a sensitive process. Combine this with questions around unused sick leave, and it’s no wonder so many employers feel overwhelmed trying to ensure they stay compliant with the law.

The good news? With the right information and planning, you can manage redundancy and sick leave correctly, meet your obligations under Australian employment law, and look after the wellbeing of your team.

In this guide, we’ll break down what you need to know about redundancy and sick leave, answer common questions like “Does sick leave get paid out on redundancy?”, outline your legal requirements, and help you avoid common legal pitfalls. Let’s help you move forward with confidence.

What Happens to Sick Leave When an Employee Is Made Redundant?

When an employee is made redundant, there are a lot of moving pieces - notice periods, final pay calculations, and, of course, accrued leave balances. But where does sick leave fit in? This is a common source of confusion for employers and employees alike.

Annual Leave vs. Sick Leave on Redundancy

When employment ends, employees are entitled to receive payment for any accrued but unused annual leave, and sometimes long service leave, in their final pay. However, personal/carer’s leave (commonly referred to as 'sick leave') is treated differently under Australian law.

Does Sick Leave Get Paid Out on Redundancy?

No - under the Fair Work Act 2009 (Cth), unused sick leave is generally not paid out on redundancy or when employment ends for another reason, such as resignation or dismissal. This applies to both full-time and part-time employees.

Sick leave (which also covers carer’s leave) is designed to support employees during the employment relationship when they are unwell or need to care for family. It is not a form of accrued entitlement like annual leave, so unless an award, agreement, or employment contract states otherwise (which is rare), any banked sick leave will be lost when the employee leaves.

Annual leave and long service leave, on the other hand, must be paid out in full according to the law and any applicable industrial instrument. If you’re unsure about distinguishing between the different types of leave and payouts, our guide to cashing out annual leave is a helpful resource.

Are There Any Exceptions?

Some enterprise agreements or contracts may provide more favourable benefits than the minimum legal standard. For instance, a particular workplace agreement could specify that some part of sick leave is paid out, but this is very uncommon in Australia.

Always check the applicable award, enterprise agreement or contract and, if unsure, seek legal advice. In most cases, however, unused sick leave is simply forfeited when an employee is made redundant.

Understanding Redundancy: What Does It Mean for Employers?

Redundancy occurs when an employer no longer requires a role to be performed by anyone, commonly because of changed business needs, restructuring, or financial difficulties. In Australia, genuine redundancy has a strict definition under the Fair Work Act - and your obligations extend beyond just calculating pay.

What Makes a Redundancy ‘Genuine’?

• The job is no longer required to be performed by anyone.
• The decision is not due to poor performance or misconduct.
• You have consulted with affected employees as required by any applicable award or enterprise agreement.
• You have examined options for redeployment elsewhere in your business (or an associated business).

Failing to meet these criteria can result in unfair dismissal claims. For more detail on the redundancy process, visit our comprehensive redundancy guide.

Redundancy Payments: What Are You Required to Pay?

Where an employee is eligible for redundancy pay (this often doesn’t include casuals or employees of small businesses with fewer than 15 staff), you need to pay:

• Outstanding wages and allowances
• Accrued but unused annual leave
• Accrued but unused long service leave (if eligible)
• Redundancy pay based on the employee's period of continuous service
• Any other payments under a contract, award, or enterprise agreement

Sick leave, however, does not need to be paid out.

Step-By-Step Guide to Managing Redundancy and Sick Leave Compliance

Let’s walk through the practical process for complying with your legal obligations around redundancy and sick leave.

1. Review the Employee’s Award, Agreement, or Contract

Before taking any steps, review all applicable industrial instruments (such as a modern award or enterprise agreement) and the employee’s individual contract. These documents set out the specific rules, notice periods, and redundancy entitlements - and may (rarely) have provisions regarding sick leave payout.

2. Check Notice Periods and Consultation Requirements

You must provide adequate notice of termination (or payment in lieu) and consult employees as required. This is an essential part of compliance and treating employees fairly.

3. Calculate Final Pay Entitlements

• Outstanding wages: All owed wages must be paid up to the end date of employment.
• Annual leave: Pay out full balance of unused annual leave.
• Long service leave: Pay out based on the employee’s entitlements (eligibility varies by State).
• Redundancy pay: Depending on the size of your business and length of service, a severance payment may be required.
• Sick Leave: No payment is due for unused sick leave, unless a contract or policy specifically provides for it.

If you need guidance on employment contract templates to clarify leave provisions, Sprintlaw can help you get these right for your team.

4. Provide Employees with a Record of Service and Statement of Entitlements

Give departing staff a written statement detailing final pay, entitlements, and the reasons for termination. This helps maintain a transparent process and reduces the risk of disputes.

5. Keep Accurate Records

Maintain clear records of all calculations and correspondence, as you may need to prove compliance if a claim is raised. It’s also important for satisfying Fair Work record-keeping requirements.

What Laws Do I Need to Follow for Redundancy and Leave?

Compliance is not just about being fair - it’s a legal requirement. Here are the main areas you need to be across when dealing with redundancy and sick leave.

• Fair Work Act 2009 (Cth): Sets minimum terms and conditions for workers nationally, including redundancy and leave rules.
• National Employment Standards (NES): The NES outlines leave entitlements, notice periods, and redundancy pay obligations. Learn more about the NES here.
• Modern Awards & Enterprise Agreements: Can provide more generous redundancy and leave entitlements, so you must check the specific terms that apply to your workplace.
• State or Territory Long Service Leave Laws: These set out the rules for paying out long service leave, which can vary significantly between jurisdictions.
• Employment Contracts: Always check each contract for any clauses that give more than the statutory minimum. Sometimes a contract may inadvertently promise greater benefits than the law requires.

It’s crucial to consult all applicable documents and regulations before implementing any redundancies. If in doubt, seek advice from a specialist employment lawyer to be certain you’re on the right track.

Do You Need Any Specific Legal Documents When Managing Redundancy and Leave?

Solid documentation and clear policies can make all the difference, not just for legal compliance, but also for maintaining a positive culture in your business. Here are key documents and policies you should have in place:

• Employment Agreements: Outlines all entitlements, including sick leave, redundancy, notice, and termination conditions.
• Leave Policy: Clearly explains how sick leave, carer’s leave, and other types of leave are managed, and what happens to these entitlements on termination.
• Redundancy Policy: Details the steps for managing redundancies, including consultation, calculation of payments, redeployment options, and communication procedures.
• Termination Letter Templates: Ensures clarity when providing notice of redundancy and stating the final entitlements.
• Record-Keeping Policy: To comply with legal retention periods and protect your business in case of disputes.

It’s a good idea to regularly review and update your employment documents. If your business contracts or policies need a refresh, see our employment contract templates guide or connect with Sprintlaw’s document review team.

Common Pitfalls and How to Avoid Them

Redundancies are stressful, but legal missteps make things even harder. Here’s how to steer clear of common mistakes:

• Failing to Consult: Many awards and agreements require the employer to consult with affected employees before ending employment due to redundancy. Skipping this step can lead to unfair dismissal claims.
• Incorrect Payouts: Confusing sick leave with annual leave can lead to unlawful underpayments (or overpayments). Always double-check which entitlements must be paid out.
• Not Documenting Redeployment Efforts: If you don’t properly consider redeployment opportunities, the redundancy may not be considered genuine.
• Poor Communication: When staff feel left in the dark, trust and morale suffer - and so does your risk profile for legal claims.
• Outdated Contracts or Policies: If your employment contracts, policies, or award references are out of date, you’re running a compliance risk. Regularly review these and update with legal help as needed.

Best Practices for a Smooth Redundancy and Sick Leave Process

• Consult early with employees and, if required, provide all necessary information about the redundancy process.
• Treat employees respectfully and communicate entitlements clearly - including why sick leave is not paid out.
• Double-check all calculations and document everything.
• Update your employment documents and workplace policies regularly to match current laws and best practice.
• Engage a legal expert before making final decisions if there’s any doubt about entitlements or compliance.

Key Takeaways

• Unused sick leave generally does not get paid out when an employee is made redundant in Australia.
• Redundancy payments must include all accrued annual and (if eligible) long service leave, but sick leave is forfeited unless a contract says otherwise.
• Always check awards, agreements, and contracts for variations to the standard legal rule.
• Consultation, notice, and redeployment obligations are critical to ensuring the redundancy is genuine and legally compliant.
• Keeping your employment contracts and policies up to date will prevent confusion and reduce legal risk.
• When in doubt, seek professional legal guidance before commencing redundancies or calculating final pay.

If you’d like a consultation on managing redundancy and sick leave in your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.